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What happened last week?
On November 7th, as anticipated, the Federal Reserve lowered its key interest rate by 25 basis points, bringing the Fed Funds target range to 4.5%-4.75%. With inflation decelerating toward the Fed’s 2% target, the policy stance remains restrictive, prompting a shift towards a more neutral rate. However, the Fed signaled a cautious approach to further adjustments, given that the U.S. economy continues to perform better than anticipated and that multiple uncertainties cloud the outlook. Notably, the election of Donald Trump and a probable united Republican Congress could significantly shape the economic landscape for 2025. This political shift suggests a mix of rate cuts, heightened tariffs, and restrictive immigration policies, all likely to push inflation higher and boost GDP growth next year. As a result, the pace of Fed rate reductions may be slower than previously projected. Reflecting this view, market pricing for the Fed’s rate trajectory has notably adjusted. Whereas markets anticipated a Fed Funds rate below 3% for the end of 2025 only six weeks ago, they now expect a rate of around 3.75% within a year. The Bank of England (BoE) also met this week, cutting its key rate by 25 basis points to 4.75%. However, future rate cut expectations have moderated in response to the fiscal stimulus announced at the end of October. This fiscal support is projected to bolster economic activity in 2025 and may add as much as 0.5% to inflation. Consequently, future markets have revised down their rate cut projections, now pricing in three additional rate cuts for the coming year, two fewer than anticipated before the budget announcement. In Europe, the European Central Bank (ECB) has seen minimal change in rate cut expectations. Concerns that U.S. tariffs could impact European growth have added to an already fragile economic backdrop, reinforcing the need for continued monetary easing. Market expectations remain steady, with five to six additional 25 basis point cuts priced in for the ECB over the next year. Switzerland’s outlook also tilts toward further easing, as inflation continues to trend downward. The Swiss National Bank (SNB) is expected to cut rates again in December, potentially by a substantial 50 basis points. With inflation unexpectedly low, the SNB’s objective is to keep the real short-term rate near zero, supporting Swiss growth while guarding against CHF appreciation relative to the euro.
Last week saw a milestone in the U.S. credit market as Investment Grade (IG) spreads narrowed to their lowest level in the 21st century, closing at just 74 basis points—10 bps tighter than the previous week. This impressive spread compression, coupled with lower interest rates, fueled a strong rally in U.S. corporate bonds. The Vanguard USD Corporate Bond ETF gained nearly +1% over the week, further highlighting the resilience of IG debt. The high-yield (HY) sector joined the rally, with spreads narrowing to 256 bps—the lowest level since 2007! The iShares Broad USD High Yield Corporate Bond ETF gained +1.3%, bringing its year-to-date performance to an impressive +9%. This trend of spread compression extended across credit ratings, as CCC-rated bonds outperformed, benefiting from renewed investor interest. The Bloomberg U.S. CCC-rated index saw spreads drop to 539 bps from 900 bps in August, with a solid +0.8% gain last week and nearly +15% YTD. For the first time since April 2022, the average yield to maturity of the CCC index has fallen below 10%, reflecting a notable shift in sentiment. In Europe, credit markets mirrored the U.S. trend, albeit with slightly more modest gains. European IG spreads tightened by 4 bps to reach 99 bps—the first time they have traded below 100 bps since the onset of the conflict in Ukraine. The iShares Core Euro IG Corporate Bond ETF outperformed, gaining +0.4% last week, while European high-yield spreads held steady at 323 bps, resulting in a +0.3% weekly gain for the iShares Euro HY Corporate Bond ETF. Among high-beta European segments, corporate hybrids are pulling ahead of bank subordinated debt, as evidenced by the Invesco Euro Corporate Hybrid ETF’s +0.9% gain last week, compared to the +0.3% gain for the WisdomTree AT1 CoCo Bond ETF. Year-to-date, corporate hybrids are up +10%, outpacing AT1 bonds, which have gained +8.8% YTD. In summary, last week’s spread tightening across both IG and HY segments reflects increased confidence in credit markets, fueled by both improving economic outlooks and the recent rate cuts that have supported corporate debt performance. As the markets head into the final months of 2024, investors remain watchful of macroeconomic conditions and the U.S. fiscal policy landscape, which will undoubtedly influence credit dynamics.
Last week was one of the most impactful of the year for the U.S. bond market. The 10-year Treasury yield initially surged to 4.50%—a level last seen four months ago—while the MOVE Index, often called the "VIX of bonds," soared to 136, marking its highest level in a year. Yet, following the election results, we saw a significant shift: the 10-year yield retraced to 4.30%, and the MOVE Index dropped back to below 100, levels not seen since September. The market seems to have calmed now that the outcome of the U.S. elections is clear, although uncertainty remains about how the new administration's policies could affect the outlook for 2025. The post-election reaction largely took on a “sell the news” tone, with the iShares USD Treasuries ETF rising +0.5% over the week. Treasury Inflation-Protected Securities (TIPS) saw even stronger performance, as the iShares USD TIPS ETF gained +0.75%, with the 10-year breakeven rate up 3 basis points to 2.36%. Across the Atlantic, Germany faced a week of political upheaval, with Chancellor Olaf Scholz dismissing Finance Minister Christian Lindner over deep disagreements on fiscal policy, particularly the constitutional "debt brake" limiting public borrowing. Despite this, German bonds remained steady, with the 10-year yield closing the week at 2.36%, down slightly from September levels. Spreads between German bonds and their Italian and French counterparts widened by 2 bps to 128 bps for Italy and 75 bps for France. European bonds generally had a positive week, with the iShares Core EUR Govt Bond ETF gaining +0.3%, turning positive for November. European TIPS also performed well, with the iShares EUR Inflation Linked Govt Bond ETF up +0.5%. In the U.K., optimism surrounding potential economic benefits from the U.S. election briefly pushed the 10-year Gilt yield to a 2024 high of 4.60%. It settled down by week’s end, leaving the Vanguard U.K. Gilt ETF with a modest gain of +0.2%. The bond market’s resilience shows investors may be bracing for potentially significant policy changes in both the U.S. and Europe as we move into 2025.
Emerging market
Emerging market (EM) bonds experienced a strong week, benefiting from continued spread compression and a favorable currency backdrop. The iShares Emerging Market Sovereign Bonds ETF rose by +1.8%, driven by a 10 basis point tightening in EM sovereign spreads, bringing them to 254 bps—their lowest level since 2018. EM corporate bonds also saw significant spread compression, dropping below the 200 bps mark for the first time since 2007, and lifting the iShares Emerging Market Corporate Bonds ETF by +0.6%. Local currency debt followed suit, with the VanEck J.P. Morgan EM Local Currency Bond ETF climbing +0.8%, supported by gains in EM currencies. In Brazil, the central bank raised the Selic rate by 50 basis points to 11.25%, doubling down on its hawkish stance in response to inflationary pressures. This marked the second consecutive rate hike after a 25-bps increase in September, signaling the BCB’s commitment to its 3% inflation target. Although the bank refrained from specific forward guidance, it hinted at additional rate adjustments, with market participants now eyeing a potential 75-bps hike in December. In Turkey, the central bank upwardly revised inflation forecasts, suggesting a slower-than-expected disinflation path. This slight shift in tone points to the possibility of earlier rate cuts should inflationary pressures ease further. Turkey also received its second credit rating upgrade of the year from S&P, which raised its foreign currency rating from B+ to BB-, reflecting reduced external debt servicing risk and aligning with positive rating moves from Fitch and Moody’s earlier this year. In Mexico, market expectations are for Banxico to cut rates by 25 basis points to 10.25%, amid softening industrial production data due to a slowdown in construction and manufacturing exports. The upcoming release of Mexico’s annual budget and medium-term fiscal plan will be closely watched for signs of a more gradual fiscal consolidation. Meanwhile, Colombia’s Ecopetrol saw its long-term issuer default rating reaffirmed at BB+ by Fitch, though its standalone credit profile was downgraded to ‘bbb-’ due to governance concerns related to recent board changes and strategic acquisitions. These governance challenges have raised market concerns over Ecopetrol’s operational outlook and credit risk, reflecting the sensitivity of EM corporates to shifts in governance standards. Finally, in commodity markets, OPEC+ decided to delay its planned oil production increase by one month, maintaining supply levels through December amid ongoing global economic uncertainties—a move that provides continued price support to oil-exporting EM countries.
